Is More Better?

Generally speaking, we live in a society where people value choice, and the general attitude is that more choice is better. That’s apparent when you walk down the bread aisle in the grocery store. Really? How many different ways can you package enriched wheat flour and high fructose corn syrup? Those commercials on TV advertising a particular phone service are funny. A guy sits around a table with a group of children and their responses are filmed after baiting them with questions like, “which is better – more or less?” Of course the kids scream out in unison that “more” is better. The problem is that despite our cultural biases, more is not always better.

This is very apparent in the number of investment options offered under a retirement plan. Studies have shown that too many choices for plan participants can be overwhelming and lead to analysis paralysis. In one often cited study, the University of Pennsylvania Wharton School Pension Research Council Working Paper 2003-10, it shows declining participation rates when there are more investment option choices, with a precipitous drop in participation rates when choices number thirty or more. With too many choices, the net result is that participants make poorer choices, or simply make no choice.

The 2013 403(b) Plan Survey by the Plan Sponsor Council of America (PSCA) shows some interesting statistics. On average, 403(b) plans offer far too many choices than is optimal: 27 on average for employer contributions and 31 on average for employee contributions. Higher education is a huge outlier, with 45 on average for employer contributions and 65 on average for employee contributions.

How can this be so far out of whack with the Wharton study’s demonstration of significant analysis paralysis? This is due to the historical evolution of the 403(b) market. 403(b) plans began as retail individual annuity arrangements, and each employee did their own thing. Even though legislative and regulatory changes over the years have made 403(b) plans run more and more like qualified plans, an individual attitude still exists. In fact even today there are groups calling for maintaining “choice” as a code-word phrase for continuing to let individuals do their own thing. Even though many individuals have individual brokers and advisors to work with, there has been a dearth of advisors looking at investment offerings as a whole at plan level, and how it translates to a responsible choice for participants.

ERISA has it right. There needs to be a responsible party to review the investment options and provide a prudent line-up for participants. Clearly, there are 403(b) plans that have not done this, especially among the institutions of higher education. They probably need help from the expertise of investment professionals to help overcome the demands for and cultural bias toward more choice in favor of a better designed plan that will provide better outcomes for participants overall.

Do you agree? Let’s chat in the comments.


In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.


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  • Paul Henry

    I agree with your observation that too many investment choices can adversly impact plan pariticpants. “Choice” is perhaps more likely to be “code” for protecting plan sponsors, rather than a true reflection of demand by plan participatants for more investment options. If a plan fiduciary (especially the investment fiduciary) is making decisions that are in the best interests of the particpants, they should be taking the Wharton research findings into account.

    • friedmanaaron

      Thanks, Paul.

  • This is one of the many issues inherent in 401k plans today. There is no doubt that too much choice and investment jargon scares participants away. The ones that do take the plunge to participate are often not invested correctly.

    The vast majority of plan participants (and would-be participants!) need an easy way to choose an investment line-up that accurately reflects both their risk tolerance and years to retirement.

    We say pre-built portfolios are the way to go–mixed by an RIA who charges a flat fee that does not increase as assets go up. Participants should be allowed to dig deeper into the plan investments as they desire, but education should be focused on saving rather than attempting to create investment experts.

    Participants don’t want to be investment experts! And many of them simply decline to participate rather than trying to decipher a dizzying array of plan choices.

  • Robert Young

    I would only agree with part of this discussion, I do not agree that ERISA has it right and especially in the public school market. We handle both ERISA and non ERISA plans and the number of investments quality investments available to the education market is far superior to that of ERISA plans. You cannot draw a fair comparison of the public school market and the private sector, there are a myriad of reasons that you would understand if you actually work in this market.

    I have heard this argument ad naseam about too much choice and it is typically code for “I would like to take over the entire plan”, the problem is service or lack thereof. It is amazing that these poor investors can put money into IRAs, joint accounts and other investments with thousands of investment choices. See this argument just does not hold water.

    However there can be too many choices in 403b plans simply because a lack of direction or education on where to get started. However that does not mean put in an ERISA plan. What it does mean is to work with the administration of the district to coordinate a real meaningful financial education plan. We have done this with tremendous success and typically recommend 5-12 vendors and a very robust suite of investments and quality financial advisors to help these employees. Where the true problem has been for years in this market is a complete lack of message, this is where ERISA has it right, one message on how the plan works, how to get started and who to contact. Allow the advisor the tools to determine the type of investment based on the client needs and don’t limit their resources to do this.

    • friedmanaaron

      Interesting perspective. Thanks for the comment. I would note that public k-12 doesn’t have the opportunity to be an ERISA plan by statute, so there isn’t an opportunity to put in an ERISA plan. ERISA and its fiduciary structure provides a great way to provide reasonable choice with fiduciary oversight. However, the ERISA structure cannot be used to tame the wild west in public plans. If you’ve found good solutions for a responsible offering, then that’s great-but unfortunately is in the minority in public k-12. I’ve also heard the arguments about protecting individual advisor relationships in the retail market. That may be good for those employees with those relationships, but leaves a significant number of them on their own.